The strength of their stocks would lead you to believe things couldn’t be better for the major auto manufacturers. After all, the S&P 1500 Automobile Manufacturing Index wouldn’t be up 318% for the last twelve months by mere chance, would it?
The short answer is ‘no’. Ford (NYSE:F) and Toyota Motor (NYSE:TM) both saw greater revenues and earnings in their most recent quarters than in the prior comparable quarters from a year earlier. You can add Honda Motor Co. (NYSE:HMC) and Daimler AG (NYSE:DAI) if earnings growth is your only concern.
The long answer is….. well, it’s a very strong ‘it depends’.
The rest of the story: With the exception of last quarter’s numbers from these major manufacturers, there’s still not a whole lot to get excited about with the car industry. In all four afore-mentioned cases, revenues remain well shy of pre-2007-implosion levels…. and likely won’t get back there anytime in 2010.
Yet, the average stock in the group is fast-approaching 2007’s prices.
All well and good, until investors start to realize they’ve paid a small fortune for companies that aren’t producing a great deal of profits yet. Indeed, with the exception of Ford, the forward-looking P/E ratios (what we like to think of as the price of profit) are running at a relatively rich 17.35 level. Investors could - and have – done worse, but they could also easily do better elsewhere.
Where the lurking auto ‘values’ are: So if the auto manufacturer stocks are no longer the best way to tap into the budding automobile market recovery, what is the best way? Look under the hood…. literally. Or, look behind the dashboard, at the undercarriage, or in other obscure areas on a car.
While a limited number of automaker stocks – weighed down by a few too many pricy ones – can present a challenge for investors, the auto parts manufacturing industry offers a multitude of effective ways to ride the auto rebound, with far more diversity when it comes to fundamentals.
Naming names: Take Johnson Controls (NYSE:JCI), for instance. After topping earnings estimates in each of its last three quarters, investors should be wondering if the projected (2010) P/E ratio of 14.02 underestimates the company.
The biggest Cinderella stories of all, however, may come from the tiniest stocks in the mix… names like Dorman Products (NASDAQ:DORM) and Wonder Auto Technology (NASDAQ:WGAT).
Though both boast market caps of a mere $350 million, both have also managed to do something in 2009 that even the big boys in the business couldn’t do – beat 2008’s top lines and bottom lines. In fact, Dorman posted four straight earnings ‘beats’, and Wonder Auto’s forward-looking PE ratio is a stunningly-low 9.6.
Moreover, the ability for both outfits to avoid taking any quarterly losses [that’s right – not even one] during the recession should speak volumes about their resiliency.
Lesson learned: Sometimes, the obvious choices staring you in the face – via the news – aren’t necessarily the best choices. Looking under the hood both literally and figuratively can uncover smaller but much more valuable stocks… names the media would never bother talking about.